Sulake - economics

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Sulake - economics

Poste  Admin on Man Mar 21, 2011 4:49 am

In Sulake's first 5 years, a lot of projects were assignments for others. Kultakala for Kolumbus/Elisa, Habbo initially for Habbo Limited, Habbo Switzerland for Orange, VMK for Disney and CokeStudios for Coca-Cola. But over the years the 'Goldfish' concept aka Habbo Hotel became the core of business. Instead of exclusively lending the hotel for others to use, exploiting it yourself and let other parties 'rent' it for a while proved a more solid and profitable venture. Habbo Hotel was made a global youth brand in the first years, and growth numbers were impressive.

Well, not entirely on its own, Sulake has had some major investments over the years. By Taivas, Elisa, 3i, Benchmark Capital and Movida Group, that as such get a share in the company (we're reading (old numbers) 26% is still in hands of both founders and the CEO (chief executive officer), Timo Soininen). Next to that, while some local hotels are Sulake's doing only, in some countries they partnered with a local company and share revenue. French hotel has been in partnership with M6, Dutch hotel a partnership with TTG, Japanese hotel was a partnership and recently German hotel partnered with RTL, Spanish hotel with Antena. In 2003-2004 12 new hotels were added to the existing 3.

Investments took place in roughly 4 rounds:
2000-2001: Undisclosed - investors Taivas and Elisa;
2003: €4 Million - investors 3i (€3M) and Taivas (€1M);
2005: €18 Million - investors Benchmark Capital (€10+M), 3i (€4M) and Elisa (€4-M);
2006: €6 Million - investor Movida group.

The Movida investment was specifically aimed at concurring the Asian market. In 2006 new hotels for Brazil/Portugal, China and Russia opened. At the same time, other countries/communities are added by just making local payment options available. It's a thing Sulake staff mentions as being proud of. Much of the success is explained by the strategy of making payment as easy as can be, by fully taking local situation into account and always providing multiple options. If all that is settled, Sulake considers a local community a fact.

In 2007 Sulake re-organized its company. Explosive growth of years before stagnated (still growing, just less growth when being expressed in percentages), reason for some users to declare the decline of Habbo. But the growth it had is not sustainable forever. If it stops, though, any company needs to re-think things, naturally. There's been heavily cut to keep the company healthy, less staff, but also offices in Switzerland, Sweden and Norway closing. Chinese hotel closed completely (not necessarily driven by economic reasons (only), though), Canada still in but trimmed, whether Russian hotel survived a question still at the time, and plans for new hotels frozen. While seemingly grim, most of the existing hotels were doing well. Strengthen succesful branches, cut weak sections. It was also the year IRC-Galleria was aquired, btw.

Above we've put some numbers of revenue (money earned) and investments (money put into Sulake by companies getting a share) together. Based on revenue only you can see explosive growth of early years tempered over 2006-2007.

You can't expect a company to question their own numbers publicly, rather the opposite. Sulake mostly focusses on registered accounts, but we all know that hardly says anything (clones, spending numbers etc). Revenue and investments count. Even so, they're just numbers. If you earn a million, but also spend a million, no profit there. Revenue mentioned for 2006 a rough estimate, as undisclosed (based on a quote by Sulka Haro). Actual profit made in 2009 undisclosed too, for now.

A global economic crisis in 2009, and two more hotels closing down. Russian hotel closed in February, and, very unexpected, the Japanese hotel pulled the plug in April. Number of visitors in Russia never lifted off, so no surprise there, but the Japanese hotel had a steady (not huge, ok) amount of visitors. Might have had to do with their partner there, might be the cost/profit ratio simply didn't make it a valid enterprise to continue.

But also, October 2009, 40 people (of 300 employees) lost their job at Sulake, as part of an attempt to reduce overall workforce by 20%.¹ Most made analysis, money made is good (2008, around € 50.000.000)², but most of it is spend, not much profit. It's also being commented while former years have been characterized with huge growth of visitors and income, there actually wasn't much profit at all. What goes around is last quarter of 2007 was the first to be profitable (whole year wasn't), 2008 actually being the first year with a (small) profit. Why ? It all went straight back into development of existing and new projects. Analysers seem to think Sulake is no good in keeping costs low.³ Might be some truth in there, seeing these measures. Not taken into account by these people are costs for developing new services. IRC-Galleria, least profitable (and said to have a growth stagnation), is having multiple international versions being developed, and 2009 is also the year Bobba Bar for mobile phones was introduced. It's yet to be seen how and when this is made profitable. Beta versions had the options to build rooms like in Habbo, but with it coming out of beta, being renamed from 'Bobba' to 'Bobba Bar' and being released on the iPhone, that is discontinued. They now started selling pre-decorated rooms. "Habbo will remain the crown jewel of Sulake although we believe the new product we will be launching this [year] would represent a notable part of revenue already in 2011-2012" (Outi Henriksson, March 2009).

We are admirers, we have no desire to be cynics. But to be fair, quite a couple of (publicly announced) objectives were not met. Entering the Asian market was no success. Extending the Habbo brand to other area's, there were lot of attempts (no, you can't have my shirt), but no sustainable results. Habbo shop vanished, maybe you can still order cards, stickers and stuff at some shops (no native Sulake initiatives anymore). Connection with mobile phones, CD's once produced, mobile games, Snouthill ?

A notable side(?)-venture that is live, btw, is what Sulake calls 'Habble'. Basically, they're monitoring what's being said - brand names - within hotel, for instance before and after a campaign. They always did (George) and might just be using same tools for a different cause. And it can be considered a follow-up on the Global Youth Survey. It's all anonymous, but knowledge about you is worth something :p.

Anyway, the 'old' Habbo in itself though, is doing well, with Brazilian/Portuguese hotel topping Spanish hotel these days (number of visitors in both are huge), and in general revenue seems pretty good. More precise, Sulake seems to have found the right balance to get some solid profit out of it. Key here, we think, is they have really focussed on a) constant delivery of new features, and b) delivering long-running entertainment campaigns, with loads of new things (graphics, stories, purchasable items). Think Valentine, Halloween, Christmas. Combine that with a third party wanting exposure and that doubles the value. Think American Idol, Twilight, MTV awards. Consensus of economicly skilled commenters seems to be it's the costs/profit ratio that needs work. At least partly true, and that obviously is getting some attention. Sulake's flagship for now, Habbo, is on the right track, though.

At time we started writing this, Sulake was nearing its 10th birthday. Ten years to get a company running, products ironed out and running smoothly. Not enough, it seems, and that reflects in online writers still labelling Sulake as a 'startup' company. Maybe that is just true, and maybe that is not even bad. It's not easy building an online company, and the investors, while not seeing profit right away, seem to have given the company a lot of credit, believing in its products. We tend to consider Sulake a company only now shaking off that 'startup' label. Habbo, it took a while, close to mature by now. Cost reduction not done yet, 2010 will see the merge of both North-American hotels. Bobba Bar, just starting. It took Sulake years (Minifriday) to find a workable platform. Now that it works, they've yet to make it profitable. International spreading of IRC-Galleria, loads of beta sites around by now, but yet to be seen how these can compete with, well, loads of competitors. No matter what, Sulakes' products all seem out of early development by now, history just starts.

Which showed when in May 2010, Sulake reported it's best first quarter ever (Q1-2010). Even when profit was said to be tempered by costs for platform migration (Shockwave to Flash, but that mostly affected profit for 2009, we reckon) and cost savings/restructering of organisation (also mostly for 2009, but continuing in 2010), profit (€ 2.3M) is solid. Reasons mentioned by Sulake for growth (here) are succesfull campaigns, adaptions to payment systems/internal economy, penetration of social network sites (Facebook, Twitter) and recovery of online advertising market. Meanwhile, cost savings continue while we prepare for the merge of all English speaking hotels.

We'll end with above interview Sampo Karjalainen gave to Tiburon-TV in January 2009, which has a clear focus on the business side of things.

¹ ArcticStartup: Sulake To Lay Off 20% Of Helsinki Employees, October 6, 2009;
² Sulake: Strong growth and profits for 2008, March 30, 2009;
³ Ramine Darabiha: Sulake has a problem, March 31, 2009.


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